The Federal Communications Commission ("FCC or Commission") released a long awaited order ("Order") yesterday that removes a key obstacle for cable operators and their affiliates seeking to acquire competitive local exchange carriers ("CLEC") with overlapping operating territories. The Order was adopted in WC Docket No. 11-118 in response to two related petitions filed by the National Cable and Telecommunications Association ("NCTA") in June 2011. Although the FCC found that Section 652(b) of the Communications Act of 1934, as amended, (the "Act") "unambiguously prohibits a cable operator from acquiring any LEC providing telephone exchange service within the cable operator's franchise area, absent an applicable statutory exception or waiver granted pursuant to the statute," the FCC proceeded under its general forbearance authority to decide to forbear application of the Section 652(b) proscription on a limited basis, namely in those cases where a cable operator (or the affiliate of a cable operator) seeks to acquire a CLEC. In so doing, the Commission found that streamlining the regulatory approval process for these types of mergers would promote competition and yield innovation and investment to the benefit of consumers. The Commission made clear that it was removing merely one piece of the approval puzzle and that cable acquisition of CLECs would still be subject to FCC review under Section 214 of the Act, other federal government review (such as the Department of Justice and the Federal Trade Commission), potentially local franchising authority ("LFA") review under local franchises and state statutes, and other review processes not covered by Section 652.

The Commission Confirmed the Prohibition under Section 652(b) As Applied to Cable-LEC Transactions

The first part of the Order addressed the language of Section 652(b) which on its face prohibits the purchase by a cable operators and their affiliates of more than a 10% financial interest, or any management interest, in a local exchange carrier that provides telephone exchange service within the cable operator's franchise area, unless one of the exceptions from Section 652(d) applies (such as a rural system or an acquisition in a competitive market). Section 652(d) also provides for possible waiver of the application of this prohibition upon petition to the FCC and upon obtaining approval from the cable operator's LFA. NCTA sought, through a Petition for Declaratory Ruling, to have the Commission confirm that Section 652(b) did not apply to the acquisition of CLECs but only to the acquisition of incumbent LECs ("ILECs").

In response, the FCC found that, even though the legislative history suggests that Congress probably intended only to prohibit consolidation between ILECs and cable operators in overlapping territories, there was no ambiguity in the statute's language. The plain language of the provision, the Order concluded, prohibits the acquisition by a cable operator or its affiliate of more than a 10% financial interest, or of any management interest, of any LEC with an overlapping territory. The Order accordingly denied the NCTA Petition for Declaratory Ruling.

The FCC Will Forbear from Applying Section 652(b) to Prohibit Cable Operator Acquisitions of CLECs

NCTA, in the alternative, also requested general forbearance from the application of Section 652(b) to proposed cable operator acquisitions of overlapping CLECs. NCTA requested forbearance under Section 10(a) through a Conditional Petition for Forbearance from Section 652 of the Communications Act filed simultaneously with its Petition for Declaratory Ruling. The Order found that limited forbearance from application of Section 652(b)'s prohibition – in cases where a cable company (or its affiliate) seeks to acquire more than a 10% financial interest, or any management interest, in a competitive LEC with overlapping territory – meets the three-prong test of Section 10(a) under which the Commission evaluates requests to forbear from applying any provision of the Act or FCC regulations to any telecommunications carriers or service or a class of such carriers or services.

In coming to its decision to grant forbearance, the FCC first dealt briefly with objections from two commenters that questioned the FCC's jurisdiction to forbear from applying Section 652(b) on grounds that the prohibition of cable operator acquisitions of CLECs with overlapping territories was not a regulation that applied to telecommunications carriers or telecommunications services. The Order determined that the Section 652(b) prohibition was indistinguishable from regulation of CLECs and the telecommunications services they provide, giving the FCC the jurisdictional authority to resolve NCTA's request for forbearance.

Proceeding to apply the traditional Section 10(a) analysis, the FCC found that, because mergers among non-dominant providers pose little risk of competitive harm and often increase competition, these acquisitions further the purposes of the Telecommunications Act of 1996 and serve the public interest. For the same reason, the FCC concluded, enforcing the Section 652(b) prohibition is not necessary to ensure that charges are just and reasonable and not discriminatory. The Order also found that continued application of Section 652(b) to proposed cable operator acquisitions of CLECs is unnecessary to protect consumers, in part, because these acquisitions will still be subject to Section 214 review by the Commission. The Commission added that the Department of Justice, Federal Trade Commission, and possibly the LFAs would still have the opportunity to review such transactions, for example, under antitrust and local franchise frameworks distinct from Section 652.

The Commission explained that forbearance would create parallel regulation of transactions between cable operators and CLECs regardless of which entity acquires the other. In the absence of forbearance, transactions in which a CLEC acquired a cable company would be regulated differently than transactions in which the cable company acquired a CLEC. The Commission reiterated in the Order that Section 652(a), which prohibits LEC acquisition of cable companies with overlapping service territories, applies only to ILEC acquisitions of cable companies where ILEC was providing telephone exchange service in the relevant overlap areas as of January 1, 1993, not CLEC acquisitions. (The Order also noted that the proscription against cable operator-LEC joint ventures in overlapping service areas contained in Section 652(c) also does not apply to CLECs.) Accordingly, given the more limited scope of the Section 652(a) prohibition, the FCC found that maintaining enforcement of the more broadly interpreted Section 652(b) prohibition to cable operator acquisitions of CLECs with overlapping territories would preserve a difference for which there is no justification and which would not be in the public interest.

Given the Commission's decision to forbear, it dismissed as moot the other relief sought by NCTA in its Conditional Petition for Forbearance. NCTA had requested forbearance from the Section 652(d)(6)(B) requirement that the relevant LFAs approve Commission waivers of Section 652(b) or, alternatively, that the FCC establish substantive standards and time limits governing LFA review of FCC waivers of the prohibitions of Section 652.

Please be advised that attorneys in Kelley Drye & Warren's Communications practice group are experienced in addressing issues related to all aspects of this Order. For more information regarding this client advisory, please contact your usual Kelley Drye attorney or any member of the Communications practice group.